The Wind of Change

Asset managers are facing a stark choice between technology investment or obsolescence.

Not Harold Macmillan's speech, or the seminal Scorpions power ballad, but market structure.

Change is a funny thing. On a fundamental level, change is necessary for growth—Darwin recognized this in his theory of natural selection, where variations of traits that were useful survived, whereas those that were not, by necessity, died out.

Degrees of this theory are beginning to become apparent on the buy side, driven by dual winds of change. On one side, regulation and the actions of watchdogs are forcing an element of evolution. Meanwhile, technology is buffeting the buy side from the other end, leading to a more natural form of speciation among those that can leverage advances in technology and those that cannot.

The UK’s Financial Conduct Authority played a big role in this over the past few weeks, first with its scathing assessment of flaws in the UK’s asset management industry, and second by firming up its implementation objectives for the review of the Markets in Financial Instruments Directive (Mifid II).

On Mifid II, the research question has been tossed back and forth for years, on both sides of the Atlantic. Every day seems to bring a new survey on how many buy-side firms are woefully prepared for January 3, 2018, when the rules take effect, while vendors are releasing their ready-made solutions at a breakneck pace.

What remains striking, though, is how these dual currents of change are complementing each other. On unbundling, managing research payment accounts at such a granular level will, of course, require an element of technology to accomplish, while regulations have already blurred the line between the legislative and technical processes. Mifid II, after all, was delayed by a year for the precise reason that the technology base required to comply didn’t have a hope of being ready in time.

When it comes to managing the improvements that the FCA wants to see from UK asset managers, too, a healthy dose of technology will be required to manage enhanced transparency and disclosure requirements, along with addressing concerns around client communications and calculating performance. WatersTechnology has been reporting in recent weeks that performance measurement has elevated the middle office to a crucial role in many firms—this will not halt that ascent in any way.

How firms adapt and grow with these requirements depends much on their attitude toward the two pillars of change, and whether they see them as a caduceus or an ouroboros—two intertwining strands of change, or a cycle that eventually eats itself.

Those that are able to use technology in an efficient way, and develop as an organization, are the ones who can benefit from speciation. For others, well, that’s where natural selection comes into play.

This week on Buy-Side Technology:

  • Remember bring-your-own-device, and all of the hand-wringing about iPhones potentially destroying finance as we know it? Oh, how we laughed. Good news, as my colleague Emilia David reports today, it hasn’t gone away. In fact, it’s gotten far worse.
  • Bitcoin swap execution facility LedgerX gained full approval from US regulators this week, but it’s still waiting on the nod for its clearinghouse. I’m reliably informed by people familiar with the situation that it’s being looked at, but it’s a bit like starting a marathon with a dead leg at present.
  • After reading this profile of Cheyne Capital’s Josh Jacobson, I’m wondering whether watching a former editor fling a coffee cup into the newsroom wall inspired me to examine journalism at a fundamentally psychological level. I suspect it prompted me to file my copy faster.
  • Michael McGovern has been appointed to lead Brown Brothers Harriman’s fintech business and I don’t even know what a bank is anymore. Is it technology, is it a vendor? Will the day come where we walk in to get a mortgage and walk out with a five percent stake in a disruptive payments company?
  • Anthony and I didn’t have a guest on this week’s podcast, but if you want to hear a Brit criticizing the major league system in American sports, and the irrational disregard for promotion or relegation in favor of investor protection, then this is your jam.
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